The brutal tragedy of at least one KaloBios short seller was first documented a week ago [5]when we noted the margin call massacre that befell "novice" trader Joe Campbell, who went to bed with a $35K short on Wednesday and woke up with a $106 margin call the next morning after it was revealed that a "consortium" led by Martin Shkreli had taken an unknown stake in heretofore insolvent KBIO.
However, the story did not end there because the very next day we got new information that Shkreli had not bought just any amount of KBIO shares but a whopping 70%, which got us thinking: is the "most hated man in America [6]" contemplating to unleash a Volkswagen scenario, in which he has acquired enough shares to leave more shorts outstanding than there is actual float, and then one day to simply pull all the borrow by no longer lending out shares to potential shorters.
This is what we said last Friday [7]:
In other words, Shkreli's consortium had acquired 70% of the company, and should they decide to pull the borrow, on the odd chance that the short interest had soared to above 30%, KBIO - which until a few days ago - suddenly has the potential to become the next Volkswagen: a company which has more shares short than there is float available to cover them.
We added:
What happens if Shkreli's plan is indeed to rerun the "Volkswagen" scenario and unleash an epic short squeeze that sends the price of the company into the stratosphere, unlinked from any fundamentals, but merely soaring ever higher as desperate shorts pay any price just to get out.
We hope to find out as suddenly this until recently bankrupt company whose price has exploded in the past two days, has become not only a poster child for everything broken and manipulated with the market (think 2014's CYNK one year forward) but has the market following with morbid fascination to find out how the tragicomedy of "Shkreli vs the Shorters" concludes.
And then two days ago, when it was still unclear just what Shkreli's intentions are, but when the stock had already soared well into the $40-range, we again warned that [8]"if [Shkreli and friends] pull the borrow and demand delivery, there will simply not be enough shares outstanding to satisfy all shorts, leading to, drumroll, the next Volkswagen."
Oddly enough, there was a radio silence from Shkreli who supposedly had mentioned he had no intention of demanding share delivery, which made us wonder if he was merely waiting for the right moment to strike.
Then something caught our attention: last night Bloomberg reported that according to Markit, the short interest in KBIO had soared to 49% of the free float from just 5.6% on Nov. 16.
Surely, if there was any trigger to push Shkreli to demand delivery, this would be it.
And, not unexpectedly, this is precisely what he did earlier today.
I spoke with my counsel & advisers and decided to stop lending my $KBIO [9] shares out until I better understand the advantages of doing so. 1/2
— Martin Shkreli (@MartinShkreli) November 26, 2015 [10]
I apologize for any inconvenience this may create in lending markets and I will probably resume lending at some point. Happy Thanksgiving!
— Martin Shkreli (@MartinShkreli) November 26, 2015 [11]
And now the squeeze really begins, as all those 49% who are short KBIO, according to Markit, rush for the nearest exit, while those who are currently long the stock refuse to sell at any price knowing they have all the leverage.
Whether this will translate into a Volkswagen circa 2008-type scenario, which incidentally looked as follows...
[12]
... and where a company which is for all intents and purposes bankrupt suddenly trades with a market cap in the hundreds of millions or even billions as desperate shorts pay any price just to get out.... tune in tomorrow to find out during tomorrow's abbreviated session, because the KaloBios comedy is nowhere near concluded.
As for Shkreli... well he is already the "most hated man in America" - might as well double down.